Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Celgene is a highly successful biotech company, standing out from hundreds of smaller peers with its large stable of highly successful drugs and therapies. But competition in the health-care space never goes away. How is Celgene standing up to its rivals? Let's revisit how Celgene does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.


Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Celgene.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$47.1 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

0.64

Pass

 

Worst loss in past five years no greater than 20%

0.7%*

Pass

Valuation

Normalized P/E < 18

39.81

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

NM

NM

       
 

Total score

 

5 out of 8

Source: S&P Capital IQ. NM = not meaningful; Celgene doesn't pay a dividend. Total score = number of passes. * This figure represents a gain; Celgene's stock has not declined in any calendar year in the past five years.

Since we looked at Celgene last year, the company has kept its five-point score. Failing to pay dividends is the kiss of death on our scale, but the stock has produced an impressive total return, gaining 50% over the past year.

For Celgene, the big driver for growth lately has been multiple myeloma drug Revlimid. With more than a decade to go before its patent expires, Revlimid's $3.7 billion in sales during 2012 stand only to increase over time. Johnson & Johnson has a competing drug in the space, Velcade, but even with its fast growth, industry analysts expect Revlimid to maintain its competitive advantage well into the future.

The rest of its drug lineup has been a mixed bag for Celgene. Vidaza is still its No. 2 seller despite having lost patent protection, but that could change at any point if a generic competitor comes into the market, which Celgene expects by the beginning of 2014. Moreover, earlier this month, Celgene's phase 3 trial of psoriasis drug apremilast produced disappointing results, as a lower proportion of patients reached the trial's end goals than in previous phase-2 trials. With efficacy levels more than double what apremilast was able to achieve, AbbVie's Humira seems poised to retain its blockbuster status, even though apremilast met its primary endpoint and could be part of an application for FDA approval later this year.

But Celgene hasn't been afraid to take risks in order to boost its prospects. The $2.9 billion that Celgene spent to buy Abraxis and its Abraxane treatment for metastatic breast cancer in 2010 represented a big gamble at the time, and so far, sales of the drug haven't climbed very quickly. But with multiple ongoing studies looking to expand the drug's use to treat other diseases, Abraxane has substantial potential, especially in the difficult-to-treat pancreatic cancer area.

For retirees and other conservative investors, Celgene's high valuation and lack of dividend make the stock a departure from the usual fare for a retirement portfolio. Only if you're comfortable with Celgene's future growth prospects would it make sense for you to consider adding the biotech as part of the more speculative side of your investment strategy.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Despite its valuation -- or perhaps because of it -- every in-the-know biotech investor has an eye on Celgene. Shares have skyrocketed this year as the company outlined a plan to almost triple its profits in only a few years. But should you buy the story Celgene is selling? Make sure you understand the key opportunities and risks facing this company by picking up The Motley Fool's brand new premium report on Celgene. To claim your copy today simply click here now.

Add Celgene to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Celgene Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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